For the last few months, until Congress raised FDIC insurance to $250,000, a lot of people were absolutely freaking out about their banking deposits. The largely symbolic move from $100,000 to $250,000 affected practically no one at that point but it made me wonder how the wealthy protected their liquid assets. I didn’t consult with any professionals on this but there are two very simple ways: CDARS (Certificate of Deposit Account Registry Service) and Treasury notes.

CDARS

The Certificate of Deposit Account Registry Service is something that your bank may offer and it can protect your deposits for up to $50 million. The program is very simple and essentially handles the paperwork of opening up Certificates of Deposit at multiple banks. There is a “loophole” in the FDIC insurance in that it covers you for $100,000 ($250,000 until December 2009) per person per institution. CDARS offers $50 million in protection because they open up CDs at multiple partner institutions. You could do it yourself, but they are simplifying the process and likely taking a little bit in interest to pay for expenses and make some money (I wonder how those rates compare with the best CD rates I’ve found?).

Treasury Notes

All Treasury Notes are backed by the full faith and credit of the United States government. Should that level of infinite insurance fail, the dollar would be worthless and your last concern would be over your deposits! We saw many institutions rush to put their money in short term notes when the credit crisis hit its apex a month or so ago and that was because those notes are protected 100%. As a consumer, you can buy Bills, Notes, Bonds, and Treasury Inflation-Protected Securities (TIPS) through Treasury Direct, the Treasury’s online management system.

For people like you or me, opening up a few high yield savings accounts will probably be sufficient to cover our liquid asset protection needs.

Since I couldn’t buy electronic Series I bonds in time because of user error, I went to the local bank and purchased paper Series I bonds instead. The next step is to convert the paper bonds into electronic bonds and the Treasury Department makes that pretty easy.

Why Convert?

I’m converting because I don’t want to lose the certificate. If you lose the bond, you can always replace it by filling out Form PDF 1048 Claim For Lost, Stolen or Destroyed United States Savings Bonds but if the conversion process is easy, why risk it?

Another good reason to convert is that you’re able to redeem the bonds in any increment, you aren’t restricted to the increments you converted. The only rule is that you must redeem at least $25 and what’s left can’t be less than $25, which shouldn’t be an issue.

Lastly, after thirty years, the bonds are automatically redeemed. There’s no chance you’ll find the bonds in the attic somewhere in sixty years, after missing out on thirty years of interest. (there are more reasons and I just realized they have them listed on the SmartExchange site, so check them out there if you’re not convinced)

How To Convert

The system TreasuryDirect uses is called SmartExchange. Anyone with a TreasuryDirect account can convert paper bond certificates into electronic bonds (if you don’t have a TreasuryDirect account, open one… it’s easy but it takes a week or two to get everything all set up).

The next step is to log into your account and use their Contact feature to notify TreasuryDirect that you’d like to convert your bonds. Then, after a few days you’ll receive this email confirmation:

Hello.

You can now create your own conversion linked account by following these steps:

* Access your TreasuryDirect account.
* Click the ManageDirectsm tab.
* Select the “Establish a Conversion Account” option from the Manage My Linked Accounts menu. The Establish a Conversion Account page will display. Review the information.
* If you wish to create a Conversion Linked Account, click the Create Account button

The next few instructions are just as the email describes except instead of looking for a “Establish a Conversion Account” you’re actually looking for “Establish a Conversion Linked Account.” On that next page, click on Create Account and with that, you have created a Conversion Linked Account! (* Welcome to your new Conversion Linked Account! You may begin converting your paper bonds at any time. Yay!)

The process from here is simple and mechanical with detailed instructions available on the TreasuryDirect site in the ManageDirect page. You will essentially create a list of bonds, print out a manifest, and mail in the bonds (there’s no point in me republishing the actual details, they give step by step instructions). The process takes about three weeks once they get the bonds and you can track it by viewing your electronic manifest through ManageDirect. Use that to track the status of your bonds.

As an aside, having logged into TreasuryDirect about a million times in the last few days, I have to say the security access card is a pain in the rear. Luckily if you fail too (3?) many times (I kept forgetting to pick a serial number), they report that you failed but don’t actually lock you out. You can just keep trying, great security!

(Image by joan_thewlis)

I recently purchased a bunch of Series I Savings Bonds because of the favorable fixed interest rate (1.20% if you managed to score some in April 2008) and the favorable future inflation-pegged interest rate (~2.4%). The Series I is popular because you do get to lock in both a fixed rate plus an inflation based rate. The fixed portion is set when you buy it and the inflation portion is pegged to CPI-U. If you can get protection against inflation through a Series I, why does a Treasury Inflation-Protected Securities (TIPS) even exist?

Similarities

The two notes, while having the same aim, have very little in common outside of characteristics that make them both government bonds. One of the few similarities they share deals with tax considations. Earnings from both are exempt from state and local income taxes but still subject to federal income tax. That’s where the similarities end.

Differences

The primary difference between the two is in how the inflation is factored into the equation on the note’s yield. With the Series I bonds, the inflation portion of the interest rate is announced every May and September and is integrated into the yield of the bond for the next six months according to the rate equation.

With the TIPS, the interest rate of the bond is set at auction when you purchase the bond and the principal is adjusted every six months with inflation. At maturity, the TIPS bond is valued at higher of the inflation adjusted principal and the original principal, so you can’t lose your principal because of deflation.

Another big difference is how often interest is paid and how it is taxed relative to spending on education expenses. Series I accrues interest on a monthly basis and pays out when the bond is redeemed. TIPS pay out interest twice a year. The Series I earnings may be exempt from Federal taxes if they are used to finance education.

There is one final significant difference between the two with regards to redemption and trading. You can sell a TIPS on the secondary market, meaning I can sell you my TIPS, but you cannot sell a Series I bond. In fact, you can’t redeem a TIPS prior to its maturity, you can only sell it (when it matures, you’re “selling” it back to Uncle Sam).

There are other details such as minimum maturity period, minimum bond purchase and other details but I didn’t think those were important for the basis of comparison. It’s hardly significant that the minimum purchase for an I bond is $25 versus $100 for TIPS. Oh, one entertaining difference is that you’re limited to $5,000 in paper and another $5,000 in electronic Series I bonds; the limit for TIPS is $5 million each of 5-, 10- and 20-year Treasury TIPS.

As you can see, there are many more differences than there are similarities between the two notes despite both having an inflation component. It appears that TIPS provide more cash flow but Series I is better if you plan on funding education with it in the future.

(Image: joan_thewlis)

Late last month I wrote about how my wife and I were going to consolidate our Vanguard accounts by transferring the assets in her individual mutual fund account into my individual mutual fund account. As it turns out, there is an even better way to do this and I was surprised the original Vanguard CSR didn’t mention it (I don’t blame him as I did ask him three different questions and this was the third and least significant one).

The easiest way to do this was for me to open a Joint mutual fund account with both of our names on it, something you can do entirely online, then call up Vanguard and request that they transfer the assets from my wife’s individual account and my individual account into that joint account. By doing it on the phone, with all the verbal verification of our individual security data, we could skip a trip to a bank to get a signature guarantee. (I manage to always miss the branch managers or go to banks that don’t have a manager able to do a signature guarantee - I still haven’t changed the accounts for my TreasuryDirect account!)

This was all kicked off when I called up Vanguard to confirm I filled out their Asset Transfer form correctly. The form, while not too complicated, was a little confusing because it had two places for signature guarantees, lots of optional information, and I’m easily confused and befuddled. When I called them up, the CSR just asked if I preferred it if she did the transaction for me. Ha, of course I preferred it.

The phone conversation took fifteen minutes, which included a lot of explanation, and the conversion/consolidation process took approximately five business days; our accounts are now finally consolidated!

Last year, the Treasury Department limited the amount of Series I and Series EE Savings Bonds that a US Citizen could purchase in a single year to, effectively $20,000 (TreasuryDirect release). The limit had been $30,000 in paper certificates and $30,000 in electronic certificates for each the Series I and Series EE bonds, meaning you could feasibly purchase $120,000 in savings bonds ($30k electronic Series I, $30k paper Series I, $30k electronic Series EE & $30k paper Series EE) a year ago. The current limit not drops the total amount of savings bonds you can purchase to $20,000 a year (which is still a lot for most Americans).

Why? The stated reason was to “refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.” That is not achieved by lowering the maximum limit, that was achieved when TreasuryDirect allowed you to purchase electronic bonds as low as $25 each.

Another reason was that “Approximately 98 percent of all annual purchases of savings bonds by individuals are for $5,000 or less.” Again, that’s not a legitimate reason to lower the maximum limit. The “it won’t affect that many people” defense won’t work for a lot of things, I don’t see why it’s viable here.

I suppose you could make the argument that lowering the maximum will help those with smaller sums if there was a limited supply of US Savings Bonds. However, if you take a look at our growing debt and growing deficit, you’d be hard-pressed to make the argument that US debt is in short supply.

So why? I’m at a loss and I don’t understand it well enough to make much of an informed guess. I would’ve expected the US government to want to be indebted to its own citizens, rather than foreign interests, so perhaps there is something else going on? I tried searching online but didn’t find any editorials or other insights into why the rate was (really) lowered. Anyone have any thoughts?

Incidentally, the Treasury announced the new rates and the fixed portion of the Series I Savings bond dropped from 1.2% to 0.00%!

Today is the very last day to take advantage of the 1.20% fixed rate component on Series I Savings Bonds (unless they remain at 1.20% in the next six-month period) and if you don’t have an active TreasuryDirect account with a linked bank account, you won’t have enough time to open one and purchase electronic bonds by the close of business today (last day in April). Fortunately, you can purchase paper savings bonds from most major banks and credit unions through Form PD F 5374 (I believe PD F stands for Public Debt Form) Order for Series I US Savings Bond that they should have on hand.

The form takes about five minutes to complete and allows you to purchase bonds for yourself or on behalf of someone else. All you will need is the owner’s social security number and the amount of the bonds in cash, cashier’s check, or personal check from the bank you’re buying the funds from. If you’re buying it through M&T Bank, to use a personal check you’ll need to have an account there and use a personal check from that account. It’s not a problem if you don’t have a personal check, you’ll simply withdraw the funds and have the bank issue a cashier’s check (that’s what I did).

Remember, there is an annual limit of $5,000 per social security number for the Series I Savings Bond - be sure not to exceed that (I assume the bank will notify you if you try to purchase too much). Also, you may purchase $5,000 in paper bonds and an additional $5,000 in electronic bonds. (I bet this is because their paper and online systems aren’t connected so there’s no way they could enforce a single shared limit)

Lastly, the bonds won’t be issued right there, but the effective date of the bonds will be that date. The bank is authorized to act as an agent of the Treasury Department and so the purchase is effective as of the date on the stamp. When I bought them yesterday, it had a effective stamp date of April 29th. According to the back of the order form, processing takes about three weeks.

I don’t know if TreasuryDirect changed their policy or if EmigrantDirect changed theirs, but my attempt to purchase Series I Bonds and take advantage of the potentially awesome new rates was foiled! I received the following message from TreasuryDirect:

Dear JIM,

We’re sorry, but your purchase request IAAAB was canceled. While trying to collect payment from your bank, they returned our debit. Please check the Investor InBox section of your TreasuryDirect account for more detailed information.

Thank you for using TreasuryDirect.

It was entirely my fault. It wasn’t Emigrant Direct’s fault, or the Treasury Direct’s fault, it was Jim Direct’s fault. The only linked account I had was from an Emigrant Direct savings account and I assumed it would still be valid to make another purchase. I had purchased $100 in Series I bonds a while back just to play with the system and assumed everything was still good. Unfortunately, TreasuryDirect now debits the linked account rather than a regular ACH transfer (I think) and so a savings account doesn’t debit! (The other explanation was that there were insufficient funds, but I confirmed I had enough)

So the only solution is to head over to the bank and buy a paper Series I Bond so I can still take advantage of the upcoming favorable rates. I suspect it should be pretty easy, the government always makes it easy for you to give them your money :).

If you’re a buyer of Series I Savings Bonds, you probably already know this. If you haven’t been paying much attention to them, it might be time to perk up because Series I bonds are looking pretty good given right now. So good that I decided to purchase some of them.

Opening Treasury Direct Account

Fortunately, I opened up a Treasury Direct account a while back and had my bank account linked up so I could skip the setup process. I don’t know if the setup process still only takes five minutes, as I had written, or if it was more complicated now. I do know that Treasury Direct will be sending out new access cards for security purposes, so perhaps the setup process is a little more involved now. Regardless, I was able to find my login credentials (if you lose them, getting your ID requires a tremendous amount of information, the government doesn’t mess around)

If you aren’t familiar with Series I Bonds or Treasury Direct, you can review this primer on them, it should get you up to speed. Everything is still accurate except the annual limit per SSN has been lowered from $30,000 to $10,000 ($5k online, $5k in paper).

New Rates

The Series I Bonds’ interest rate is calculated through a fixed rate and a semiannual inflation rate. The fixed rate is announced every May and November and is valid for all bonds issued during the six month period after the announcement and is valid for the life of the bond. Last November, the announced fixed rate was 1.20%. The inflation portion is also announced every May and November and is based on the CPI-U (Consumer Price Index for all Urban Consumers) and can be reasonably predicted. It’s predicted that the announced inflation portion of the rate will be approximately 2.416%.

If you take that to be true, using the total rate calculation, you’ll get an annual rate of 6.06% - which is nearly double most online savings accounts. That’s why we’re getting some Series I Bonds. By purchasing in April, we lock in the fixed rate portion of 1.2%. This gets us 4.38% for six months then 6.06% for another six months, with the future unknown. What’s nice is that the interest is federal tax deferred (until you cash in the bond) and state & local tax free, so the effective rate is a little higher depending on your state taxes.

Redemption Rules

The only important rules about Series I bonds is that you can’t redeem them for one year and if you redeem it before it’s five years old, you surrender 3 months of interest (most recent three months). Also, in case you were interested, savings bonds are nontransferable so don’t buy them off anyone. And lastly, when you redeem the bonds you will receive a 1099-INT.

If you want more information, here’s the Treasury Direct page on Series I Bonds, which includes a list of historical rates (fixed and inflation) as well as the equation they use to calculate the composite earning rate.

(photo by allyrose18)

In reading learning I-Bonds and Treasury Direct, I felt it important that I actually open a Treasury Direct account even if I didn’t plan on buying any bonds just yet. It’s a quick five minute process and besides the typical personal information, it would be handy to have your driver’s license and your bank information (that you’ll link to the Treasury Direct account). I opted to use my Emigrant Direct account (Name: Emigrant Savings Bank, Routing #: 226070319, it’s important to have the name typed correctly) as the linked bank.

The account opening process was two pages long (the second was just pick a password, a hint, and some security verification questions) and I was surprised that the password could only be a combination of letters and numbers but no big deal. According to the webpage my account was setup and ready to go, less than five minutes! Look in your email inbox for an email with your account number.

I-Bonds have received a ton of press lately, especially from personal finance bloggers, and they appear to be a better alternative for your savings than certificates of deposit (CDs). CDs have a fixed rate (usually tied to its length) and I-Bonds have a fixed and inflation-adjusted rate (independent of the length you hold it). I-Bond income is exempt from state and local taxes and even exempt from Federal taxes if you spend the income on eligible educational expenses. As a treat, you can now purchase I-Bonds via Treasury Direct (an online resource) and never deal with a paper certificate (and enjoy a lot of new flexibilities).

About Series I Bonds

The government website has a great page detailing the mechanics of an I-Bond and it’s pretty simple to understand:
Current Rate: 4.80% through October 2005
Minimum purchase: $50 for a $50 I Bond when purchasing paper bond certificates; $25 for a $25 I bond when purchased electronically via TreasuryDirect
Maximum purchase: $30,000 in TreasuryDirect and $30,000 in paper bonds
Denominations:

• Paper bonds: $50, $75, $100, $200, $500, $1,000, $5,000, $10,000, or,
• Electronic bonds via TreasuryDirect: purchase to the penny for $25 or more

Issue Method: Paper bond certificates or electronic transfer to TreasuryDirect accounts

Early redemption rules work as follows: If you owned it for less than 5 years, you must forfeit the last 3 months of interest income. If you owned it for more than five years, you forfeit nothing. You must own it for a minimum of 1 year.

Another beauty of buying bonds, any bonds, these days is Treasury Direct. You can do all your purchasing, tracking, and redemption’s entirely online - a treat for the always-connected digital generation, of which I am a happy member of. If you’re not comfortable with doing your transactions online, the traditional offline methods work as well but do not afford you some flexibilities - such as partial redemption. As you can see from Jon’s experience, you can redeem part of your bond (something impossible traditionally) as long as you redeem more than $25 and your bond’s value, after the partial redemption, is still greater than $25. Another benefit is that you can purchase a bond for any value, down to the penny, as long as it’s greater than $25. (If you have a paper bond and want to convert it, read these instructions)

Predicting Series I Bond Rate

The website will list the current rate of return for an I-Bond but for predicting the future, Jon at My Money Blog has a great math-heavy post on predicting future I-Bond rates. The rate of return has a fixed rate component and an inflation adjusted rate component (both announced twice a year at May and November). If you had a chance to read Jon’s post then you’ll learn that there is a bit of predictability as to what the future inflation based rates will hold but predicting the changes in the fixed rate is not as simple.

There is also a potential risk associated with I-Bonds that isn’t typical of your typical bond - in a period of deflation, you can lose money with an I-Bond. If there is deflation, the inflation adjusted rate would be negative and there is a possibility (however remote) that it could go so far negative the total rate of return is negative. Of course, you would sell your bond in that scenario if you were outside the 1 year minimum hold period. For what it’s worth, the government has said that if the theoretical rate were to fall under 0%, they wouldn’t take back earnings and the bond would earn nothing.

In a few minutes I’ll be opening a Treasury Direct account, which has been explained as a 5 minute process, even though I don’t plan on purchasing any I-Bonds (I have a 7.5% second mortgage I have to pay off before I’ll consider any investment options).